Market Pulse: What worked … and what didn’t
With stocks returning 30 percent in 2013, it was an easy year to be right. Nevertheless, I’m especially proud of our 2013 Market Pulse columns as we were on the right side on several market fronts and we never wavered.
In the first column of 2013 we looked ahead and wrote, “The S&P 500 is trading for 13 times next year’s earnings and 12 times 2014’s. Overvalued? Far from it. Treasury bonds are overvalued. The 10-year Treasury, with a yield of 1.75 percent, is trading for 57 times earnings and unlike stocks there is no potential for more income. I’ll take stocks.”
We were right on both fronts. Stocks went up and Treasurys fell. First, let’s look at stocks.
Retail investors are only now beginning to move money into equities. Readers of this column, however, continually saw our bullish outlook.
While the strength in stocks baffled many analysts, we outlined the primary reason for rising prices in our February 20, 2013, article titled, “Why are stocks so strong? TINA.” TINA — There Is No Alternative — was more powerful than the financial crisis in Europe and the Fed’s tapering warning.
No article created more buzz than my March 6, 2012, article “U.S. Treasurys — a high risk investment.” I followed up on my bearish view for Treasurys on June 13, 2013. The 10-year Treasury yield began the year at 1.76 percent and ended the year at 3.03 percent. That’s why Treasury funds posted losses in 2013.
Where did we go wrong? Anticipating higher rates we recommended some adjustable rate fixed-income securities. Some worked and others didn’t.
The HSBC Adjustable Rate Series D worked as expected as its price remained stable all year and investors collected its dividend. The Goldman Sachs Series D and Eaton Vance Floating Rate (EFR) fell, however.
The interest rate on these securities is tied to LIBOR, which failed to rise. These holdings are now trading as if they are fixed-rate securities. I failed to take into account that Libor would not rise when Treasury rates rise.
After a banner 2013 it’s safe to predict that 2014 won’t be as easy. As we move forward I’ll continue to evaluate the market and individual securities and I’ll do my best to relay this information in the Market Pulse column. Enjoy.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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